NY futures continued to slip, as December dropped another 74 points to close at 83.55 cents.

It was a dull affair this week, as the market seems to have entered the summer doldrums. The average daily trading volume dropped to just 15k over the last five sessions, which compares to nearly 50k the week before. Open interest didn’t do much either, as July cleaned up its remaining 5k, while December and later months saw open positions decline by around 4k to 256k.

As pointed out last week, we would have expected a bigger reduction in open interest during this precipitous price drop, but until now spec longs and trade shorts have held on to most of their positions. Never before have there been so many contracts open at this point in time. Today’s open interest was 41k contracts higher than the previous record for this date, dating back to 2008, when 215k contracts were open. A year ago open interest amounted to 201k contracts.

The latest available CFTC spec/hedge report of last Tuesday, June 19 (which includes the 3 ‘crash days’), showed that speculators had reduced their net long position by 2.24 million bales to 9.99 million bales, which isn’t all that much considering that the market dropped ten cents. Large spec long accounts dropped from 172 to 144, indicating that some players have left the game. Most of the net long liquidation happened in July, whereas December positions have remained relatively stable during this decline.

The trade was a lot more active, as outright trade longs got out of 2.74 million bales, whereas outright trade shorts covered 4.51 million bales, for a drop in the trade net short of 1.77 million bales to 18.25 million bales. Again, most of this liquidation has taken place in the July contract, whereas the trade did very little short-covering in December and beyond.

This is confirmed by today’s on-call report, which showed that as of last Friday there were 1.52 million bales in July fixations squared away, but on-call sales for December and later months remained basically unchanged at 14.1 million bales. This compares to 8.5 million bales a year ago and 6.4 million bales two years ago. Mills have apparently decided to ‘wait out’ speculators in the hope that they would eventually give up on their longs.

Export sales were slightly below expectations last week despite the big price discount, as net new sales of Upland and Pima cotton across the three marketing years amounted to 248,200 running bales. For June/July shipment we once again had cancellations outpacing new sales by 16,600 running bales, but some of these cancellations may be due to the unavailability of suitable cotton. The pace of shipments picked up last week, as 380,500 running bales went to 28 destinations.

Total commitments for the current marketing year are at just under 17.4 million statistical bales, of which 14.1 million statistical bales have so far been exported. Additionally there are already 5.7 million bales on the books for next marketing year and another 1.1 million bales for the 2019/20-season. In other words, we currently have unshipped export commitments of around 10.0 million statistical bales for all marketing years, which compares to 6.7 million bales a year ago.

Tomorrow’s Planted Acreage report is expected to show a number of close to 14 million acres. This would be the highest acreage since 2011, when 14.73 million acres were planted. However, that year a major drought led to just 9.75 million acres being harvested, for a crop of only 15.7 million bales. Most of that drop in production happened in Texas, where 7.55 million planted acres produced only 3.5 million bales. In other words, tomorrow’s number doesn’t mean much if the drought continues to cancel out acreage in Texas!

So where do we go from here? After moving sideways for a week the market broke through its 50-day moving average today, which triggered some more sell-stops. However, from a longer-term perspective the market is still within an uptrend channel dating back to October, with its current boundaries roughly between 81 and 85 cents.

Open interest has remained elevated, as neither spec longs nor trade shorts have been willing to abandon their positions in greater numbers. In other words, the bullish bubble hasn’t burst yet, but some air is starting to seep out of it. In order to stop the leaking, trade buyers will have to return in greater numbers, but as already pointed out, they remain patient for now and hope for spec longs to blink first.

While the lack of momentum, a potentially ‘bearish’ acreage report and uncertainty on the US/China trade front might lead to further losses in the near term, there are still plenty of potentially bullish factors that could come back into play at any time, such as a struggling Texas crop, a near empty pipeline, 14 million bales in unfixed on-call sales or continued strong demand.

For now we shall go with a slightly lower bias within the trend channel, with support at around 81/82 cents and resistance near 85 cents.

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